Issue link: https://read.dmtmag.com/i/316641
36 • May 26, 2014 • Powersports Business SOLUTIONS www.PowersportsBusiness.com The other half is, what happened to the rate of discount on each ticket? Chart B tells us: The rate for V-twin went from 9.3 percent off, to 8.7 percent off. Met- ric dealers dropped from 8.6 percent off, to 7.9 percent off. And the Canadian folks cut that discount rate by almost one-third after installing loyalty, dropping from 14.1 per- cent to 9.2 percent. GROSS MARGIN GAINS And what does all of that mean? First, we throw out volume and level the playing field so we can see the effects of just the discounting. I took a flat 30,000 invoices for each group, each with their own average ticket, and found that gross margin changed as follows before and after the installation of a loyalty program: V-twin gained $19,000 in gross margin with loyalty. Metric gained $21,000 in gross margin with loyalty. Canadian gained $133,000 in gross mar- gin with loyalty. That is the effect of decreasing both the num- ber of tickets discounted, and then the rate of discounting on those tickets. And this becomes the currency I will use to pay for the costs of my loyalty program. If this literal cash amount is greater than the cost of the program —including the cost of the mer- chandise I have to hand over the counter for free — I win. If not, it was a losing proposition. So what was the cost? And the answer? Well, I don't know. BUT, I can approximate it based on four different assumptions. Four variables affect the cost of the loyalty program. Here we go: The First Variable: The rate at which points are given to the customer. I see a range from 3-5 percent of purchases for this. For example, if the customer buys $1,000 in parts, he or she gets anywhere from $30 to $50 in credit, with which they get "free stuff." The Second Variable: How many of my customers with points will come back and ask for goodies? Guess what. Look in your wallet. Tell me how many gift cards you have that have that have expired or will expire. Various sources tell me that this is running about 20 percent. So you will probably see a request for free stuff only about 80 percent of the time. The Third Variable: What is your cost of goods sold? What is your gross margin rate? If you are maintaining a high margin in your pricing structure, your cost of giveaways will be lower that the low-baller down the street who runs on cost plus nada. Every dol- lar in merchandise he slides over the counter costs him a dollar. For you, it might be only 60 cents. And this becomes a major factor. And the Fourth Variable: What is your fixed monthly cost to license the program? I see that this cost ranges from $175 to $300 per month. With these facts, I'm going to construct two cases. The first case will be a high cost program that has the following conditions: High accrual to customers at 5 percent of purchases High loyalty redemption rate of 80 per- cent Low gross margin on merchandise at 30 percent High fixed cost of $250 per month ($3,000 annual) for the loyalty program The low cost program will be: Low accrual rate to customers of 3 percent Low redemption rate of 70 percent High gross margin on redeemed mer- chandise at 40 percent Low fixed cost of $175 per month ($2,100 annual) for the loyalty program The results of these two cases are summarized in Table 1. But before reviewing the table, keep in mind that there is no value given here for an increase in customer retention. And (let's hope) there certainly should be. But given only the measureable facts that we have, we see in Table 1 that the V-twin and metric folks come out ahead only if they tightly monitor the conditions of the program. They pick up $4,200 and $8,300, respectively, over the year. But the Canadians — largely due to their abundance of currency from cutting both the rate and frequency of discounting — are making a cool $114,800 on just these 30,000 invoices. Now, what if we move all these dealers to the high-priced spread? Give away a ton on the percentage of points, make sure that everybody comes back in to get their free stuff, and have that free stuff marked at low prices so they are sure to get a wheelbarrow full? If they do, the V-twins and metrics are suckin' air. And the Canadians? They are still killin' a fat hog. We'll be talking a lot more about this, I'm thinkin'. Oh, and one more thing. You want a little more cash to pay for this thing? Change the discounting culture in your store. No more. It's got to go. Give those good customers points. Keep your cash, and hopefully, watch them come back for more. There's the facts, folks. Read 'em and weep. Or better yet, carpe that diem. PSB Hal Ethington has been associated with the powersports industry for more than 40 years. Ethington is a senior analyst at ADP Light- speed. Contact him at Hal.Ethington@adp.com. ETHINGTON CONTINUED FROM PAGE 34 Chart A Percent of Discounted Parts Counter Tickets Prior to Loyalty Install, and Post Loyalty Install 36.5% 31.9% 33.6% 27.7% 46.3% 28.4% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Before install of loyalty program After install of loyalty program V-Twin Metric Canada Prior to install of loyalty program Post install of loyalty program Chart B Prior to Loyalty Install, and Post Loyalty Install Rate of Discount on Discounted Parts Counter Tickets 9.3% 8.7% 8.6% 7.9% 14.1% 9.2% 0% 2% 4% 6% 8% 10% 12% 14% 16% V-Twin Metric Canada Before install of loyalty program After install of loyalty program PERCENT OF DISCOUNTED PARTS COUNTER TICKETS RATE OF DISCOUNT ON DISCOUNTED PARTS COUNTER TICKETS CHART A CHART B Source: ADP Lightspeed P34x36-PSB7-Solutions.indd 36 5/14/14 2:23 PM